Suppose you and a friend of the opposite sex are recruited for an experiment. You are brought into separate rooms and told that you will be asked some questions and, unless you give consent, all of your answers will be kept secret.

First you are asked whether you would like to hook up with your friend. Then you are asked whether you believe your friend would like to hook up with you. These are just setup questions. Now come the important ones. Assuming your friend would like to hook up with you, would you like to know that? Assuming your friend is not interested, would you like to know that? And would you like your friend to know that you know?

Assuming your friend is interested, would you like your friend to know whether you are interested? Assuming your friend is not interested, same question. And the higher-order question as well.

These questions are eliciting your preferences over you and your friend’s beliefs about (beliefs about…) you and your friend’s preferences. This is one context where the value of information is not just instrumental (i.e. it helps you make better decisions) but truly intrinsic. For example I would guess that for most people, if they are interested and they know that the other is not that they would strictly prefer that the other not know that they are interested. Because that would be embarrassing.

And I bet that if you are not interested and you know that the other is interested you would not like the other to know that you know that she is interested. Because that would be awkward.

Notice in fact that there is often a strict preference for less information. And that’s what makes the design of a matching mechanism complicated.  Because in order to find matches (i.e. discover and reveal mutual interest) you must commit to reveal the good news. In other words, if you and your friend both inform the experimenters that you are interested and that you want the other to know that, then in order to capitalize on the opportunity the information must be revealed.

But any mechanism which reveals the good news unavoidably reveals some bad news precisely when the good news is not forthcoming. If you are interested and you want to know when she is interested and you expect that whenever she is indeed interested you will get your wish, then when you don’t get your wish you find out that she is not interested.

Fortunately though there is a way to minimize the embarrassment. The following simple mechanism does pretty well. Both friends tell the mediator whether they are interested.  If, and only if, both are interested the mediator informs both that there is a mutual interest. Now when you get the bad news you know that she has learned nothing about your interest. So you are not embarrassed.

However it doesn’t completely get rid of the awkwardness. When she is not interested she knows that *if* you are interested you have learned that she is not interested. Now she doesn’t know that this state of affairs has occurred for sure. She thinks it has occurred if and only if you are interested so she thinks it has occurred with some moderate probability. So it is moderately awkward. And indeed you know that she is not interested and therefore feels moderately awkward.

The theoretical questions are these:  under what specification of preferences over higher-order beliefs over preferences is the above mechanism optimal? Is there some natural specification of those preferences in which some other mechanism does better?

Update: Ran Spiegler points me to this related paper.

A firm has a basic goal:  maximize profits.  And then it has day-to-day decisions. It is far too complicated to every day try to trace through the consequences of those basic decisions on the fundamental objective of maximizing profits. A manager who tried to do that would spend so much time thinking that by the time he figured it out the day would be over and he’d have to start thinking again about tomorrow’s decision.

So firms don’t hire managers like that. Managers cling to intermediate goals, like say maximize market share. The best intermediate goals are the ones that are easy to monitor and which do a pretty good job of proxying for the underlying goal. These intermediate goals eventually become part of the culture of the firm and knowledge of their connection to the underlying goal can get lost. The manager can’t distinguish between intermediate goals and fundamental goals.

Now a consultant comes in to advise the manager. A consultant’s job is to show the manager how best to pursue his goals. So the very first thing a consultant should do is find out what the manager’s goals are. And here’s where the dilemma arises. The consultant might actually be smart enough to figure out that the manager’s goals are just intermediate goals. Does he say “De Gustibus” and advise the manager on how to pursue his goals even if he can see that in this particular instance it works against what the manager should really be maximizing?

Or does he have enough ambition in his job as advisor to try to convince the manager that his goals are all wrong, that he should really be maximizing something else? I honestly wonder what the smart consultant does in these situations.

More generally, in everyday life we have arguments about what’s the right thing to do. A lot of the time these arguments are confounded by the inability to distinguish whether we are arguing about the right course of action given our common goals (an argument that can be settled) or whether we have really just chosen different intermediate goals (loggerheads.)

Presh Talwalker tells us about this study of parking strategies:

They observed two distinct strategies: “cycling” and “pick a row, closest space.” They compared the results. “What was interesting,” [Professor Andrew Velkey found], “was although the individual cycling were spending more time driving looking for a parking space, on average they were no closer to the door, time-wise or distance-wise, than people using ‘pick a row, closest space.’”

And commenters are inferring that hunting for the best spot is a sub-optimal strategy.  But those that are searching for the best parking spot are not interested in reducing their expected parking time, rather they care about the second moment.  When we have an appointment there is a deadline effect:  our payoff drops precipitously if we arrive past the deadline.  Faced with such a payoff function we are typically wiling to increase our expected parking time if in return we can at least increase the probability of getting lucky with a really good spot.  “Pick a row, closest space” guarantees we will be a bit late.  “Cycling” may increase the average searching time but at least gives us a chance of being on time.

Dr. Doom did not get approval for the tub from the Department of Buildings, which resulted in the violation. He’s been ordered to remove not only the tub, but also the deck and party room (replete with a bar and bathroom) which he had constructed on the roof of his $5.5 million East First Street pad. The ruling apparently came about after a complaint levied in February.

If you’re still grappling to get a sense of what will be lost now that these parties—at least, in the form they previously inhabited—will cease to exist, here’s a wonderful quote Roubini gave toNew York which paints quite the picture of both his allure and the nature of the shindigs.

“[The models who attend my parties] love my beautiful mind. I am ugly, but they’re attracted to the brains. I’m a rock star among geeks, wonks and nerds,” he said. “[What makes the parties so great are] fun people and beautiful girls. I look for 10 girls to one guy.”

The full story is here.

  1. Exercise: find a name such that when you sing The Name Game (“banana fana fo …”) all three words you get are insults.
  2. The Northwestern Women’s Lacrosse team has won the NCAA championship like every year but two in the past decade.  The two losses make the overall dynasty more impressive.  Discuss.
  3. Why do fat people slide farther when they reach the bottom of a water slide?
  4. When hiking in a group, if an accurate measure of (changes in) elevation is unavailable but you have a watch and a GPS it’s better to share the work of carrying the backpack by dividing the time rather than the distance.

You are walking back to your office in the rain and your path is lined by a row of trees. You could walk under the trees or you could walk in the open. Which will keep you drier?

If it just started raining you can stay dry by walking under the trees. On the other hand, when the rain stops you will be drier walking in the open. Because water will be falling off the leaves of the tree even though it has stopped raining. Indeed when the rain is tapering off you are better off out in the open. And when the rain is increasing you are better off under the tree.

What about in steady state? Suppose it has been raining steadily for some time, neither increasing nor tapering off. The rain that falls onto the top of the tree gets trapped by leaves. But the leaves can hold only so much water. When they reach capacity water begins to fall off the leaves onto you below. In equilibrium the rate at which water falls onto the top of the tree, which is the same rate it would fall on you if you were out in the open, equals the rate at which water falls off the leaves onto you.

Still you are not indifferent: you will stay drier out in the open. Under the tree the water that falls onto you, while constituting an equal total volume as the water that would hit you out in the open, is concentrated in larger drops. (The water pools as it sits on the leaves waiting to be pushed off onto you.) Your clothes will be dotted with fewer but larger water deposits and an equal volume of water spread over a smaller surface area will dry slower.

It is important in all this that you are walking along a line of trees and not just standing in one place. Because although the rain lands uniformly across the top of the tree, it is probably channeled outward away from the trunk as it falls from leaf to leaf and eventually below. (I have heard that this is true of Louisiana Oaks.) So the rainfall is uniform out in the open but not uniform under the tree. This means that no matter where you stand out in the open you will be equally wet, but there will be spots under the tree in which the rainfall will be greater than and less than that average. You can stand at the local minimum and be drier than you would out in the open.

Why are conditional probabilities so rarely used in court, and sometimes even prohibited?  Here’s one more good reason:  prosecution bias.

Suppose that a piece of evidence X is correlated with guilt.  The prosecutor might say, “Conditional on evidence X, the likelihood ratio for guilt versus innoncence is Y, update your priors accordingly.”  Even if the prosecutor is correct in his statistics his claim is dubious.

Because the prosecutor sees the evidence for all suspects before deciding which ones to bring to trial.  And the jurors know this.  So the fact that evidence like X exists against this defendant is already partially reflected in the fact that it was this guy they brought charges against and not someone else.

If jurors were truly Bayesian (a necessary presumption if we are to consider using probabiilties in court at all) then they would already have accounted for this and updated their priors accordingly before even learning that evidence X exists.  When they are actually told it would necessarily move their priors less than what the statistics imply, perhaps hardly at all, maybe even in the opposite direction.

A balanced take in the New Yorker.  Here is an excerpt.

A core objection is that neuroscientific “explanations” of behavior often simply re-state what’s already obvious. Neuro-enthusiasts are always declaring that an MRI of the brain in action demonstrates that some mental state is not just happening but is really, truly, is-so happening. We’ll be informed, say, that when a teen-age boy leafs through the Sports Illustrated swimsuit issue areas in his brain associated with sexual desire light up. Yet asserting that an emotion is really real because you can somehow see it happening in the brain adds nothing to our understanding. Any thought, from Kiss the baby! to Kill the Jews!, must havesome route around the brain. If you couldn’t locate the emotion, or watch it light up in your brain, you’d still be feeling it. Just because you can’t see it doesn’t mean you don’t have it. Satel and Lilienfeld like the term “neuroredundancy” to “denote things we already knew without brain scanning,” mockingly citing a researcher who insists that “brain imaging tells us that post-traumatic stress disorder (PTSD) is a ‘real disorder.’ ”

And

It’s perfectly possible, in other words, to have an explanation that is at once trivial and profound, depending on what kind of question you’re asking. The strength of neuroscience, Churchland suggests, lies not so much in what it explains as in the older explanations it dissolves. She gives a lovely example of the panic that we feel in dreams when our legs refuse to move as we flee the monster. This turns out to be a straightforward neurological phenomenon: when we’re asleep, we turn off our motor controls, but when we dream we still send out signals to them. We really are trying to run, and can’t.

He died earlier this week.  If you grew up in Southern California, and you watched TV, you may have forgotten Cal Worthington but his dog Spot, the acres and acres of cars, the “Go See Cal”, the giant selection of cars and trucks on sale, the “open every day til midnight” and the music in the way “nineteen” springboarded the cars vintage out of your set and into your ears are all still stored away in some synapses somewhere in there and they’re all gonna come flowing out when you watch this video and probably bring with them a whole bunch of other stuff lost in there that you are gonna be pretty tickled to find again.  RIP Cal Worthington.

Should restaurants put salt shakers on the table?  A variety of food writers weigh in on the question here.

The naive argument is that salt shakers give diners more control. They know their own tastes and can fine tune the salt to their liking. The problem with this argument is that salt shaken over prepared food is not the same as salt added to food as it is cooked.  A chef adds salt numerous times through the cooking process to different items on the plate because some need more salt than others.

So the benefit of control comes at the cost of excess uniformity in the flavor. But beyond that, there is an interesting strategic issue. When there is no salt shaker on the table the chef chooses the level of saltiness to meet some median or average diner’s taste for salt. All diners get equally salty food independent of their taste. Diners to the left of the median find their dish too salty and diners to the right wish they had a salt shaker.

A reduction in the level of saltiness benefits those just to the left of the median at the expense of those far to the right and at an optimum those costs outweigh the benefits.

But when there is a salt shaker, the chef can reduce the level of saltiness at a lower cost because those to the right can compensate (albeit imperfectly) by adding back the salt. So in fact the optimal level of salt added by a chef whose restaurant puts salt shakers on the table is lower.

So the interesting observation is that salt shakers on the table benefit diners who like less salt (and also those that like a lot of salt) at the expense of the average diner (who would otherwise be getting his salt bliss point but is now getting too little).

There are two rationales for a limited strike on Syria: (1) Deter Assad from using chemical weapons again and (2) Send a signal to Iran that the US will enforce a red line against nuclearization.

The implicit threat of a tough response from the principal if an agent takes a Bad action must be coupled with the promise that there will a soft action if he takes the Good action. If the principal always takes the tough action as he is a hawkish type or always takes the soft action as he is a dovish type, the agent’s incentives are not responsive to the principal’s strategy. In the absence of incentives, the Bad action is optimal for the agent. The principal’s welfare is low because the agent takes the Bad action. The principal has to signal he is a coordination type to truly change the agent’s incentives.

Voters don’t like war just for the sake of it – they pay the costs and see little benefit (Kantian peace). But they can be convinced to go to war if there is a serious national security threat. There are coordination types. By going to Congress, the President imports the preferences of the median voter. The agent knows that the Good action is more likely to be met with a soft response and a Bad action with a tough response. The agent responds is more likely respond with a Good action. So the President’s payoff goes up whatever his true type. Hence, going to Congress is a great idea for the President whether he is hawkish, dovish or coordination type.

Imagine that the President convenes his top economic advisors to get a recommendation on a pressing policy issue. They say unequivocally “do X.” The President asks why and they say “its complicated. Do X.” The President, not happy with that, decides he is going to read the economic literature on the pros and cons of doing X. After a thorough study he comes back to his advisors and says “You economists don’t understand your own science. I read the literature and I should do Y.”

I think we would agree that’s a bad outcome. For probably exactly the same reason that Doctors don’t seem to be happy with economist Emily Oster’s apparent advice to pregnant women to drink alcohol “like a European adult.”

But let’s assume that Emily truly can interpret the published statistical literature better than her Obstetrician. There is another reason to question her recommendations.

An advisor’s job is to advise on the risks of an activity. Because the advisor is the expert on that. The decision-maker is the expert on her own preferences. The correct decision is based on weighing both of these.

A recommendation to have up to a glass of wine per day while pregnant confounds the two sides. What it really means is “I like wine a lot.  I also read about the risks and decided that my taste for wine was strong enough that I am willing to live with the risks.” Thus her recommendation amounts to “If you like wine as much as I do you should drink up to a glass per day when you are pregnant.”

When I asked my doctor about drinking wine, she said that one or two glasses a week was “probably fine.” But “probably fine” isn’t a number.

The problem is that there is no way to quantify how much she likes wine and so no way for her readers to know whether they like wine as much as she does. Likewise it is too much for Emily to demand her doctors to say much more than “probably fine.”

The doctors’ advice is based on some assumption about the patient’s taste for wine weighed against the risks. Emily’s advice is based on a different assumption. As for the risks, when Emily reads the literature and concludes that the evidence is weak of the danger of drinking alcohol she then jumps to the conclusion that it is weaker than what the doctors thought. She makes the identifying assumption that their recommendation was conservative because they overestimated the risks and not because they underestimated her taste for wine. But there does not seem to be any basis for that assumption because her doctors never told her what they believed the risks to be and they never asked her how much she likes wine.

One of my favorite subjects is woven through the highly entertaining This American Life segment about Emir Kamenica.  I highly recommend listening.  Unrelated to the main story, at the very beginning Michael Lewis details a very nice defense of plagiarism:

The concept was alien to me, I mean I just thought it was an odd concept because you repeat what other people say all the time, I was just repeating what someone else said, it was a very intelligent thing to repeat. And I thought I was saving us a lot of trouble… save him the trouble of having to read something really awful and I wouldn’t have to write a boring book report or even read the boring book and so I was doing both of us a favor.  And it seemed sortof counterintuitive to have to generate a thing that had already been done.

Our garbage cans sit on a back alley that is shared with a large apartment building. Last week, I found that our bins were full of trash left by a couple of people from the building. Their names and apartment number were on several Amazon boxes so I left them a note saying “Please do not dump your trash in our garbage cans. If you carry on doing it, I’ll call the City and complain.” Next morning, when I went out to the alley, I discovered several mattresses, a bed frame and other furniture.

I was attempting deterrence – “If you do x, then I will punish you with y” – but instead I caused escalation. I carried out my threat but it seems my erstwhile neighbors had moved out so my threat had no bite. This is an example of a generic problem in international relations – you take an action that is meant to deter but it backfires and causes escalation. We face a similar problem in Syria.

First, there is an international “norm” against the use of chemical weapons. Implicitly, it contains the threat that anyone who uses chemical weapons will face punishment of some form. The international community wants to make sure Assad does not use chemical weapons again, so someone has to step up and punish him. Or so the argument goes.

Second, there is the issue of “reputation”. The President threatened Assad with repercussions if he crossed  a “red line” on the use of chemical weapons. We also threatened Iran with repercussions if they cross their own red line with nuclear development. So, to maintain our credibility with Iran, we have to carry out our threat to punish Assad.

This akin to the reputation model of the chain store paradox as studied by Kreps and Wilson. A chain store faces entrants in many towns. If accommodation is cheaper than fighting in any one town and these payoffs are common knowledge, there is no predation via a backward induction argument. But if the chain store might be run by a “crazy” entrepreneur who loves to fight entry, a “rational” type will pretend to be crazy. Since both crazy and rational types fight entry, entrants should stay out.

Something like this argument lies beneath the “red line” argument for a limited strike against Assad.

First and foremost, we can attack Syria even if they do/did not use chemical weapons. In the chain store paradox this cannot happen – the chain store fights entry if it occurs but it can’t just fight for the hell of it if entry does not occur. In Syria, we can try for regime change and employ the use of chemical weapons as an excuse to intervene militarily. We can do this even if Assad backs down. This may seem farfetched to us but after the experience in Iraq and Libya as a pose to the survival of the regime in North Korea, this does not seem implausible to outsiders. So, if Assad thinks American will attack whatever he does, this does not increase his incentive to back down. Expecting attack, he might fight harder.

Plus Iran get the same signal – America wants regime change. So, they will redouble their efforts to go nuclear.

This is as plausible a forecast of future events as any other.

Roy is coming to plant flowers in Zoe’s garden. Zoe loves flowers, her utility for a garden with x flowers is

z(x) = x.

Roy plants a unit mass of seeds and the fraction of these that will bloom into flowers depends on how attentive Roy is as a gardener. Roy’s attentiveness is his type \theta. In particular when Roy’s type is \theta, absent any sabotage by Zoe, there will be \theta flowers in Zoe’s garden in Spring. Roy’s attentiveness is unknown to everyone and it is believed by all to be uniformly distributed on the unit interval.

Jane, Zoe’s neighbor, is looking for a gardener for the following Spring. Jane has high standards, she will hire Roy if and only if he is sufficiently attentive. In particular, Jane’s utility for hiring Roy when his true type is \theta is given by

j(\theta) = \theta - 2/3.

(Her utility is zero if she does not hire Roy.)

Roy tends to one and only one garden per year. Therefore Roy will continue to plant flowers in Zoe’s garden for a second year if and only if Jane does not hire him away from her.

Consequently, Zoe is contemplating sabotaging Roy’s flowers this year. If Zoe destroys a fraction 1 - \alpha of Roy’s seeds then the total number of flowers in Zoe’s garden when Spring arrives will be x = \alpha\theta. Of course sabotage is costly for Zoe because she loves flowers.

There will be no sabotage in the second year because after two years of gardening Roy goes into retirement. Therefore, if Zoe destroys 1-\alpha in the first year and Roy continues to work for Zoe in the second year, Zoe’s total payoff will be

z(\alpha\theta) + z(\theta)

whereas if Roy is hired away by Jane, then Zoe’s total payoff is just z(\alpha\theta).

This is a two-player (Zoe and Jane) extensive-form game with incomplete information. The timing is as follows. First, Roy’s type is realized. Nobody observes Roy’s type. Zoe moves first and chooses \alpha \in [0,1]. Then Spring arrives and the flowers bloom.  Jane does not observe \alpha but does observe the number of flowers in Zoe’s garden. Then Jane chooses whether or not to hire Roy away from Zoe. Then the game ends.

Describe the set of all Perfect Bayesian Equilibria.

I haven’t decided yet and I can’t figure out which side this is evidence for:

Me:  Oh I have to remember to set up your desk today because I promised that I would and that if I didn’t I would give you $2.

7 year old:  I was hoping you would forget.

Me:  Are you saying you would rather have $2 than your desk?

7yo:  No, I am saying I would rather have $2 today and my desk tomorrow.

Me:  Hold on, what would you rather have:  $2 today and your desk tomorrow or $2 today, another $2 tomorrow and then your desk the next day?

7yo:   $2 today, another $2 tomorrow and then my desk the next day.

Me:  $2 today, $2 tomorrow, $2 the next day, and then your desk the day after that?

7yo:  Yep.

Me:  And what is the number of days you would like to have $2 before you finally get your desk?

7yo:  Infinity.

Here’s the preview:

Students all over are starting college this month, and some of them still have a nagging question: what, exactly, got me in? An admissions officer tells us the most wrongheaded things applicants try. And Michael Lewis has the incredible story of how a stolen library book got one man — Emir Kamenica — into his dream school. (Photo: Emir as a Harvard undergrad. Credit Terri Wang.)

From The New Yorker

Now, imagine an animal that emerges every twelve years, like a cicada. According to the paleontologist Stephen J. Gould, in his essay “Of Bamboo, Cicadas, and the Economy of Adam Smith,” these kind of boom-and-bust population cycles can be devastating to creatures with a long development phase. Since most predators have a two-to-ten-year population cycle, the twelve-year cicadas would be a feast for any predator with a two-, three-, four-, or six-year cycle. By this reasoning, any cicada with a development span that is easily divisible by the smaller numbers of a predator’s population cycle is vulnerable.

Prime numbers, however, can only be divided by themselves and one; they cannot be evenly divided into smaller integers. Cicadas that emerge at prime-numbered year intervals, like the seventeen-year Brood II set to swarm the East Coast, would find themselves relatively immune to predator population cycles, since it is mathematically unlikely for a short-cycled predator to exist on the same cycle. In Gould’s example, a cicada that emerges every seventeen years and has a predator with a five-year life cycle will only face a peak predator population once every eighty-five (5 x 17) years, giving it an enormous advantage over less well-adapted cicadas.

Here’s my accurate but unsubtle description of Coase’s methodology (listen to audio for my brief moment of fame). Reporter does a good job though.

We were interviewed by the excellent Jessica Love for Kellogg Insight.  Its about 12 minutes long.  Here’s one bit I liked:

We go around in our lives and we collect information about what we should do, what we should believe and really all that matters after we collect that information is the beliefs that we derive from them and its hard to keep track of all the things we learn in our lives and most of them are irrelevant once we have accounted for them in our beliefs, the particular pieces of information we can forget as long as we remember what beliefs we should have.  And so a lot of times what we are left with after this is done are beliefs that we feel very strongly about and someone comes and interrogates us about what’s the basis of our beliefs and we can’t really explain it and we probably can’t convince them and they say, well you have these irrational beliefs.  But its really just an optimization that we’re doing, collecting information, forming our beliefs and then saving our precious memory by discarding all of the details.

I wish I could formalize that.

When you over-inflate a kid’s self-esteem you achieve a short-run gain (boost in confidence) at the expense of a long-run cost (jaded kids who learn that praise is just noise.) For that reason, emphasis on managing self-esteem gets a lot of scorn.

But what is the cost of jaded kids? They learn to see through your lies. All that means is that their credence is a scarce resource that parents must manage. In a first-best world you are honest with your kids right up until the stage in their lives when a false boost of self-confidence has maximal payoff. Probably when they are taking the SAT.

Unfortunately it’s not a first-best world: even if you don’t lie to them, other people will and eventually they will learn to be appropriately skeptical. Which means that a child’s trust is an exogenously depreciating resource. It’s just a matter of time before they are relieved of it.

Given the inevitability of that process you have two alternatives. Deplete their credence yourself and choose what lies they get told in the process, or be always truthful and allow their trust to be violated by outside forces.

Doing it yourself at least gives them the admittedly transient benefit that comes from an artificial boost of self-confidence.  And the sooner the better.

Ronald Coase has passed away.

Coase was the last “classical” economist. His style is closer to Marshall than to Samuelson. He asked deep questions and proposed simple but deep answers without using maths. So, a certain style of doing economics passes away with him.

The work of his I am most familiar with concerns the theory of the firm: Why are some transactions mediated through markets while others take place within firms? Suppose Microsoft and Nokia have to work together to supply phones. MS can own human capital that generates software, Nokia can generate the hardware and they can exist as separate firms and trade. Or MS can produce the end software/hardware product and employ Nokia workers in an integrated firm.  Coase’s point is that if there are no transactions costs, there is property-right neutrality. Both institutions should generate the same joint surplus and it does not matter whether they are integrated or not. People often stop there and that is all they know about the “Coase Theorem”. But in fact, Coase’s second point is that property right neutrality is crazy hence there must be transactions costs and we must study these as well as the usual costs of production we normally invoke. Once we have a good understanding of transactions costs, we will understand why some transactions take place through firms and other through markets.

The downside of having a classical style is that no-one really understands what you mean. First, there was controversy about the Coase Theorem itself – was it in fact a  theorem? Coase never called it that (I think it was Stigler who coined the phrase) and Samuelson though it was wrong. But, I think by now we do believe it is a theorem and the property right neutrality obtains for transferable utility (MasColell, Whinston and Green has a simple argument).  But what are these pesky transactions costs that determine the boundary of the firm? There we have no consensus. One leading theory invokes costs of haggling ex post if two firms are not integrated (Wiliamson got the Nobel Prize for this theory). The other says there are no costs of haggling ex post and bargaining in efficient but there is a hold up problem in bargaining as surplus is split. Knowing this firms underinvest ex ante. The allocation of property rights affects the ex post division of surplus and hence this leads to a theory of optimal property rights (this theory has been developed by Oliver Hart with his co-authors Sandy Grossman and John Moore (GHM)).

The counterargument to Williamson’s theory is typically that if haggling generates transactions costs, we should see vertical integration and no outsourcing. No interior solutions! The counterargument to GHM is more esoteric. It turns out that there are contracting solutions that are consistent with typical GHM solutions and resolve the hold-up problem. In some sense, the Coase Theorem goes through in GHM models.

So what can we learn from the Nokia and MS merger? It seems they are looking for a Ballmer replacement who is working at Nokia. And there are intellectual property issues:

Mr. Ballmer said Microsoft and Nokia had not been as agile separately as they would be jointly, citing how development could be slowed down when intellectual property rights were held by two different companies.

But also from the same NYT article:

Large acquisitions are fraught with peril, especially in the technology business, where there are challenges to integrating employees from different backgrounds into a coherent whole.

First, Coase is right – there are transactions costs that destroy property right neutrality. Second, both Williamson and GHM theories are consistent with the facts. Maybe ex post efficient trades are not occurring because of haggling over MS’s and Nokia’s intellectual property. Or knowing that surplus will be extracted by the other party ex post given its monopoly power over its patents, neither firms is fully invested in the joint venture.

So, the bottom line is that Coase had some simple but deep insights and we are still working out the implications.

Why does it seem like the other queue is more often moving faster than yours?  Here’s MindHacks:

So here we have a mechanism which might explain my queuing woes. The other lanes or queues moving faster is one salient event, and my intuition wrongly associates it with the most salient thing in my environment – me. What, after all, is more important to my world than me. Which brings me back to the universe-victim theory. When my lane is moving along I’m focusing on where I’m going, ignoring the traffic I’m overtaking. When my lane is stuck I’m thinking about me and my hard luck, looking at the other lane. No wonder the association between me and being overtaken sticks in memory more.

Which is one theory.  But how about this theory:  because it is in fact more often moving faster than yours.  It’s true by definition because out of the total time in your life you spent in queues, the time spent in the slow queues is necessarily longer than the time spent in the fast queues.

I talked to my father a couple of days ago. He’s excited ahead of his trip to India because the British pound is trading at 100 Rupees!

Why is that and what does it have to do with the Food Security Bill that gives some minimal level of food support to the Indian population?

Debraj Ray answers these two questions:

1. Rupee fluctuations:

The basic economics of this is pretty simple. Imagine a huge stock of hard-currency-denominated investible funds, forever sloshing around in search of the best returns. For a developing country, the urge to tap into these funds is immense……. And so it was that India started on the Great Upward Path: money pouring into its coffers from abroad, accompanying tariff and quota liberalization then permitting easy purchase of foreign goods without a huge depreciation in the rupee, the outward drain being more than easily matched by the inward flow.

QE, by keeping interest rates very low in the United States and the rest of the “developed world,” certainly helped here, as hot money scrambled to take advantage of relatively attractive portfolios in emerging markets.

And what money goes in comes out after the Fed hints that their easy money policy may be coming to an end and interest rates are on the rise. Hence fluctuations

2. Food Security Bill:

It is interesting that the very same business interests which have completely disregarded the dangers I’ve discussed are now floundering around for a scapegoat. Let’s see now: it must be the damn Government which is to blame. And we’re off to the usual races: cut back government spending, and yes, social spending for those lazy masses must be the first to go….

What we have is a bill that purports to bring food security to the majority of India’s population, and possibly the overwhelming majority of India’s poor, plus the additional benefits to mothers and children, for about 6% of the Indian government budget. Not for 12%, as in defense, or 9%, as in the fuel subsidy. And certainly not for the same impact, rupee for rupee, on India’s international deficit.

It’s crazy to link 2. with 1. Must the poor and innocent always pay for the vagaries of financial  markets? I hope not.

Buy tickets starting at 10AM at NUSports.com for the games against Ohio State on Oct 5 and Michigan on Nov 16.  We have added bidding this season:  you may submit a bid below the current auction price and you will receive tickets if and when the price falls to your bid level.  Here is an older post about Purple Pricing with some more information.

Israel uses it, Saddam used it, the US uses it w.r.t. Taiwan vs China policy and now Larry Summers is using it – strategic ambiguity.

[W]ith a high-profile appointment like for Fed chair or the Supreme Court, vagueness becomes a virtue. When Senate confirmation is the goal, a candidate wants to maintain wiggle room and let people project upon you whatever their preference is.

What Summers is trying to do is to create a situation in which conservative senators view him as a tough, no-nonsense central banker who will maintain the integrity of the dollar against those dirty hippies who want to debase the currency. Simultaneously, he wants liberals to view him as someone who will do whatever he can to try to strengthen job creation and find creative ways to improve growth.

Now we pretty much know Israel is nuclear but at its strategy’s inception things were not so clear. The US has not had to openly side with Taiwan or China in a significant conflict etc. This is important because it is hard to maintain ambiguity about your true preferences or nuclear status if you have been forced to reveal them in the past. Larry Summers has revealed lots about himself in the past either through policies he has embraced or comments he has made. Even if these opinions were not necessarily about monetary policy, they reveal the intellectual framework and biases that inform his economic worldview. So it is impossible to maintain strategic ambiguity as a stance.

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Foreign Policy reports:

India’s two most prominent economists have never really seen eye-to-eye. Amartya Sen, a Nobel Prize-winner and Harvard professor, believes in public interventions to alleviate extreme poverty and reduce inequality while Jagdish Bhagwati, a professor at Columbia and author of the bestselling book In Defense of Globalization, favors a more free-market, growth-first approach.

In recent weeks, the two have caused something of an uproar — “Academic Brawl,” proclaims the Economic Times — with a terse back-and-forth in the letters page of the Economist.

What is it all about? For the answer, I turned to the blog of a third prominent Indian economist (and apparently excellent cook) Debraj Ray:

1. Economic growth is fundamentally uneven.

2. Looking at rates of growth per person will fail to reveal this basic fact. High growth and extreme inequalities can co-exist. Indeed, they often do.

3. There are a number of ways to deal with uneven growth. The most important of these is occupational choice: education and training to enter new sectors. But occupational choice is slow (it will often take a generation), and it is imprecise (by the time we’re done retraining, the economy may have hared off somewhere else).

4. So other ways need to be found to even out that unevenness.

5. But wait — why won’t the good old market take care of it? It might: if growth in one sector trickles to another via expanding demand. If software engineers like potatoes, the potato farmer stands to gain. Or the tourist industry. Or hairdressers. Just how strong these intersectoral bonds are is a profoundly empirical question. Is there enough work on assessing these strengths? The simple answer is no: not nearly enough. To simply hope that the bonds will work is no good.

We have now arrived at the heart of the matter: is (5) enough? That is what the debate needs to be about. Not about Bhagwati, and not about Sen.

6. And if (5) isn’t enough, what then? Then we are left with two alternatives:

7. Active and sustained government intervention to even things out. Social spending on education. On health. [On] nutrition. On transportation and communication networks. On minimal safety nets. The market can take care of the cool stuff. The public sector gets a less sexy role: getting the basics right. That is what Drèze and Sen (and frankly, many others) are about.

Failing (7) and provided that (5) fails as well, we have just one option:

8. Sustained, crippling social conflict, not just cutting across class lines but along any marker which can be arrogated for the purpose: religion, caste, geography, language.

Via Matt Yglesias:

[B]efore Apple launched its own iOS Maps app, Google Maps for iOS was already markedly inferior to Google Maps for Android. Not because Google was incapable of producing a great Google Maps app for iOS but because they didn’t want to make one.

To get out of that bind, Apple has never needed to make a product that’s actually superior to Google Maps. What they’ve needed to do is produce an application that clears two bars. One is that it has to be good enough that your typcial doesn’t-care-too-much phone consumer doesn’t reject iOS out of hand. The other is that it has to be good enough such that if Google doesn’t want to lose the entire iOS customer base it has to scramble and release a great Google Maps app for iOS and not just for Android. Apple’s Maps app easily clears both of those bars. Before the release of iOS 6, the inferiority of Apple’s Google-powered iOS Maps app to Android’s Google maps was a real reason to prefer an Android phone. Today, there is no such reason. Not because Apple Maps is as good at Google Maps, but because Google Maps for iOS is as good as Google Maps for Android.

Its called Chhota Pegs and so far has been mostly a chronicle of a visit to Calcutta (his hometown?) where food seems to be the star attraction:

Now this is the hard part. The damn thing must cook above and below but it is thick, and hard to turn over.   On the other hand if you don’t turn it over the potatoes will burn. So what you do is cook it for a while (covered if needed) until you can move the pan and have the entire omelette wobble in it. The top will still be uncooked (if it is cooked, I’m guessing the bottom is burnt).

Then (and here you must take a large swig of what’s left of the Bloody Mary / Laphroaig and if you are married and male, remove spouse from kitchen) cover the pan with the snug plate, put on the oven mitts, and turn the whole contraption over until the omelette is on the plate.  Or at least, try turning it.

Do not forget the oven mitts as you will have to grab the bottom of the pan. Exhortations such as Allah ho AkbarJoy Ma Kali or milder (Hare Krishna!) or even secular variants, such asBande Mataram, are useful here. Indeed, I encourage them.

With a sprinkling of Peter Hammond:

Thanks to Diego Garcia (uninhabited except temporarily by various U.K. and U.S. military personnel) and to Pitcairn (population now about 50), the British Empire appears safe from sunsets for the time being. (Both these territories have websites, by the way, though that for Diego Garcia is maintained by the U.S. Navy at www.nctsdg.navy.mil.) But the sun will be getting very low over the British Empire at around 01:40 GMT in late June each year….

Also, it seems that the sun could finally set over the British Empire if the sea level were to rise high enough because of global warming. It turns out that Diego Garcia has a mean elevation of only 4 feet above sea level, and a maximum elevation of only 22 feet. Perhaps the U.S. Navy will erect dikes around their strategically located communication facilities…

And Paul Dirac:

“[W]e have an economic system which tries to maintain an equality of value between two things, which it would be better to recognize from the beginning as of unequal value. These two things are the receipt of a single payment (say 100 crowns) and the receipt of a regular income (say 3 crowns a year) all through eternity…May I ask you to trace out for yourselves how all the obscurities become clear, if one assumes from the beginning that a regular income is worth incomparably more, in fact infinitely more, in the mathematical sense, than any single payment?” (From Dirac’s biography, The Strangest Man, by Graham Farmelo. Highly recommended btw.)
Coming from a physics genius, this is quite stunning in its stupidity. The most charitable thing I can say about the bloke is that he certainly wasn’t a hyperbolic discounter. (Never mind.) I find particularly telling the following observations: (a) how winning the Nobel prize appears to confer intellectual “rights” over other disciplines that one just don’t have the ability to exercise, but more importantly (b) how fundamentally “intuition” differs from field to field, so that a genius in one area can be a blithering idiot in another.
This promises to be a good one.  I have already put it in my Safari Top Sites.
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